95. Memorandum From Secretary of the Treasury Fowler to President Johnson 1

In response to your request at the National Security Council meeting yesterday, I am attaching my views of what the United States should be saying to the Japanese in forthcoming meetings, beginning with the September 13–15 Joint Cabinet Meetings.

It is important that we pursue these balance of payments objectives with Japan independently and separately, regardless of what may evolve in negotiations over the Ryukyu Islands.

The time has passed for general discussion with Japan of balance of payments cooperation, and we should make the specific points set forth in the attached paper.

Henry H. Fowler

Attachment

TALKING POINTS FOR USE WITH JAPANESE OFFICIALS

1.
The U.S. proposes that the U.S. and Japan form a balance of payments committee—under Treasury and Finance Ministry leadership—which would have the following tasks (among others which may be defined):
a.
To discuss each country’s trends and outlooks,
b.
To maintain a current joint accounting of each country’s balance of payments, and
c.
To examine the various technical possibilities for balance of payments cooperation, including the field specifically of military transactions.
2.
With respect to military-financial planning the U.S. places great importance on complementary U.S./Japanese actions. Within the framework of complementary military roles in the area of Japan and an overall level of defense as determined by the Japanese Government, we believe there is wide potential for increased Japanese military procurement in the U.S.—up to 1/3 of the $2.8–2.9 billion in the Five Year Defense Plan earmarked for procurement of new equipment. (See attached principles for military-financial planning which would also be presented to the Japanese.)
3.
We should seek to cover by other financial measures any gap which remains between the receipts from Japanese military procurement in the U.S. and the amount of U.S. defense expenditures in Japan (a gap of probably at least 65%). Such measures would expand current cooperation to consider purchase of long-term (4–5 years) U.S. securities, prepayment of debts (PL 480, GARIOA, etc., amounting to over $400 million) and repurchase of Japanese securities held by U.S. agencies. Arrangements might consider earmarking the funds invested in securities for increased Japanese contributions to regional economic development at the time of redemption.
4.
The U.S. suggests also that we jointly consider other means for balance of payments cooperation and sharing the non-military economic burdens in Asia, such as Japanese actions to: (a) liberalize its outward investment controls (b) seek increased access to European capital markets (c) remove non-tariff barriers (d) expand markets in Europe and reduce reliance on exports to the U.S. (e) expand its economic aid contributions in Asia and (f) assume a larger share of non-military aid to South Vietnam and plan a major role in rehabilitation efforts there after the conflict ends.

Attachment

PRINCIPLES FOR U.S.-JAPANESE MILITARY-FINANCIAL PLANNING

1.
Japanese dependence on local industry for military supply principally when it is cheaper than supply from abroad.
2.
Japanese acceptance of the principle that U.S. industry should have a full opportunity to compete with third countries for military purchases.
3.
Japanese purchase of military equipment from the U.S. whenever it is desirable to do so for cost, technological or military compatibility reasons.
4.
Japanese development and production in selected cases where a premium for the technology rather than employment is considered particularly advantageous to the future national, as distinct from solely military, growth.
5.
Establishment of a cooperative research and development program, whereby (a) Japanese interests in military technology can be advanced to the maximum possible extent consistent with most efficient use of its budget resources, and (b) projects in the field of equipment co-production can be facilitated.
6.
Japanese cooperation in continuing U.S. efforts to reduce the amount of its defense expenditures in Japan.
  1. Source: Johnson Library, Confidential File, CO 141. Secret.